Pre-Foreclosure Deal Structuring

10 Replies

I used to flip houses (back-in-the-day) from 2004 to 2008. I'm getting ready to get back into the investment game and looking for some help getting educated before launch (I know A LOT has changed). I'm interested in investing in pre-foreclosures. 

Can you advise what typical strategies and/or what options are available to an investor when negotiating pre-foreclosure deals with the owner? 

  • Areas to be aware of (cautions of)?
  • How do you get them to move out? 
  • What paperwork should I have a RE attorney draft up for me? 
  • Exit strategies? 

I'm in Southern California. I paid for a pre-foreclosure list from ListSource with the following criteria: owner's having 30% to 80% equity, owner-occupied, and loan payments made for at least ten years.

My objective is to really help people out of a bad situation and turn a profit at the same time (win-win).  

Thank you! 

Originally posted by @Vito A Carlin :

I used to flip houses (back-in-the-day) from 2004 to 2008. I'm getting ready to get back into the investment game and looking for some help getting educated before launch (I know A LOT has changed). I'm interested in investing in pre-foreclosures. 

Can you advise what typical strategies and/or what options are available to an investor when negotiating pre-foreclosure deals with the owner? 

  • Areas to be aware of (cautions of)?
  • How do you get them to move out? 
  • What paperwork should I have a RE attorney draft up for me? 
  • Exit strategies? 

I'm in Southern California. I paid for a pre-foreclosure list from ListSource with the following criteria: owner's having 30% to 80% equity, owner-occupied, and loan payments made for at least ten years.

My objective is to really help people out of a bad situation and turn a profit at the same time (win-win).  

Thank you! 

 The laws have changed a lot regarding foreclosures. And, actually foreclosures are way down in number. If you insist on doing pre-foreclosures, I know that in Washington State it is a Criminal Act to solicit, mail to or contact anybody who is in foreclosure, might be in foreclosure in the future or even thinks they might be in foreclosure in the future. The civil penalty is paying them back 3 times the value of the property. Ouch! The criminal penalty depends on how many of these you are doing. Needless to say, doing pre-foreclosures some places doesn't pay. Let the borrower lose everything is the attitude.

Don't violate the S.A.F.E. Act of 2008.

The basic California law is at https://www.shouselaw.com/fraud-foreclosure.html and includes stuff like: "Civil Code 2945 and 2945.4 makes it a crime for a foreclosure consultant...that is, a person who solicits or represents that for a fee he/she can help stop or postpone a foreclosure sale...to engage in any of the following practices:" (click link for more)

Anyway, why take the risk? There are so many other, Safer ways to to invest in real estate. I choose to buy "off market" and Use Subject To and Wraps to get better returns. I recently wrote about one I did for an investor a week or two ago. Open your world to other ways than foreclosures - it's Safer to do things like this 

https://www.biggerpockets.com/forums/600/topics/58...

And there are a lot of other options.

@Vito A Carlin , CA Civil Code 2945 is for foreclosure consultants, worth reading, but probably not the one you need to worry about. If you want to buy properties that are in preforeclosure, you'll want to instead look at CA Civil Code 1695. https://www.google.com/search?q=ca+civil+code+1695. While that code outlines the requirements for doing it, I don't completely disagree with Account Closed that there is still some risk even if you follow the code to the letter. Still it's a risk that many of our customers choose to take and make a living doing.

Originally posted by @Sean OToole :

@Vito A Carlin , CA Civil Code 2945 is for foreclosure consultants, worth reading, but probably not the one you need to worry about. If you want to buy properties that are in preforeclosure, you'll want to instead look at CA Civil Code 1695. https://www.google.com/search?q=ca+civil+code+1695. While that code outlines the requirements for doing it, I don't completely disagree with @Mike M. that there is still some risk even if you follow the code to the letter. Still it's a risk that many of our customers choose to take and make a living doing.

 Hi Sean, your reference to Code 1695 is well taken. People should be aware though that any prosecutor will include Code 2945 in the charging papers and their defense will have to convince the court they have not violated "

California Code, Civil Code - CIV § 2945.1

(a) “Foreclosure consultant” means any person who makes any solicitation, representation, or offer to any owner to perform for compensation or who, for compensation, performs any service which the person in any manner represents will in any manner do any of the following:

(1) Stop or postpone the foreclosure sale."

Some cases have construed that anyone who says they will buy the property to "Stop or postpone the foreclosure sale" and then buys the property and profits from buying the property by gaining equity is in violation of the code and in some cases has committed equity stripping. (Which is also against the law.) It's up to the buyer who solicits people in foreclosure to prove that is not what happened. Good luck with that.

Account Closed while that seems at odds with the intent of 2945 (I know the folks that drafted it), prosecutorial overreach to include that wouldn't surprise me. That said, I haven't seen it charged or upheld in an actual case. Can you cite any of those cases you mentioned? Would love to add them to our help center. Also 1695 is CA's law to prevent preforeclosure "equity stripping", I'm not aware of any additional laws for that purpose. Regardless, I don't disagree that it is not the easiest place to start your real estate investing activities.

@Vito A Carlin my business is 90% in the foreclosure market and there are plenty of leads and its easy to stay away from trouble...... Simply, Don't charge $$ to help people.... help educate them for free about their options! and If they want to sell, make them a fair offer.  No laws broken, no civil code problems. 

For those that do the opposite, they deserve to get in to trouble.  I've personally helped a lot of homeowners get some money back from scammers at the threat of shopping them to the DA.

Originally posted by @Sean OToole :

@Mike M. while that seems at odds with the intent of 2945 (I know the folks that drafted it), prosecutorial overreach to include that wouldn't surprise me. That said, I haven't seen it charged or upheld in an actual case. Can you cite any of those cases you mentioned? Would love to add them to our help center. Also 1695 is CA's law to prevent preforeclosure "equity stripping", I'm not aware of any additional laws for that purpose. Regardless, I don't disagree that it is not the easiest place to start your real estate investing activities.

 I agree that there is overreach, while having you and I agree is great, the difference of some poor schmuck having to fight it out in court are two different things. Here is a reference point to start with (Link Below) - the law office can fill you in with any specific details you might have: It's a caution for "California-Law-for-Real_Estate-Investors" 

http://www.methvenlaw.com/Practice-Areas/Real-Esta...

I'm not saying that it can't be done legally or that everyone will be charged with a crime, but when there are so many other "Safer" ways ("Off Market" purchases like I do for instance) I just don't think someone new to investing should put their feet too deeply into those waters. My point is that things have changed since 2008, this a new environment and prosecutors earn points (acclaim) for being tough on those nasty investors, whether the "nasty" title is earned or not.

Account Closed appreciate the link to the law firm ad and complete agree with their advice on CC 1695 - "Moral of the story: If you are going to be purchasing preforeclosure residential property, you should have an attorney review your forms."

Most people that get in trouble working with distressed homeowners are charging upfront fee's for foreclosure postponements, loan modifications, and other loss mitigation work out options. This in my opinion is the most common reason by far that attorney's, agents, and other parties lose their license's or face penalties. 

Wrongful and misleading advertising would likely be towards the top of the list too.

@Mike M.   Do you have any references for your statement on WA State laws? I live in WA and have never heard of that restriction on contacting pre-forclosures. I'm not saying your wrong! I actually just really want to know if this is true...